At McHale & Co, we often hear from clients wanting to gift their home or place it in trust to avoid Inheritance Tax (IHT). Unfortunately, these strategies rarely work as intended and can create legal and tax complications.

The Risks of Gifting Your Home

• Gift with Reservation of Benefit (GROB) – If you continue living in the home without paying full market rent, it remains in your estate for IHT purposes and does not reduce tax liability.
• Capital Gains Tax (CGT) – If your child sells the home later, they may owe CGT on any increase in value since the gift was made, which could be a significant sum.
• Loss of Control – Once gifted, the property legally belongs to someone else, meaning they could sell or mortgage it without your consent.

Why Trusts Aren’t a Simple Solution

• Immediate IHT Charges – Transferring property to a discretionary trust above £325,000 may trigger a 20% IHT charge, making it costly upfront.
• Ongoing Costs and Taxes – Trusts are subject to 10-year IHT charges of up to 6% and additional tax liabilities when assets are distributed.
• Deprivation of Assets Risk – If the transfer is seen as an attempt to avoid care home fees, local authorities can still assess it as part of your estate.

Smarter Estate Planning Options

• Use the Residence Nil-Rate Band – Leaving your home to children can reduce IHT significantly.
• Make Regular Gifts – Small, tax-free gifts from surplus income can gradually lower your estate’s taxable value.
• Life Insurance – A policy in trust can provide funds to cover IHT without increasing your estate.
• Charitable Giving – Leaving at least 10% of your estate to charity reduces the IHT rate from 40% to 36%.

Considerations for Property Portfolio Owners

Clients who own multiple rental properties face additional complexities when it comes to IHT planning. Simply gifting properties or placing them in trust can trigger significant tax liabilities. Instead, property investors may consider:

• Incorporation – Transferring rental properties into a limited company may help with tax efficiency but comes with CGT and Stamp Duty Land Tax (SDLT) implications.
• Business Relief (BR) – If part of a trading business, some property investments may qualify for BR, potentially reducing IHT liability.
• Trusts for Portfolio Management – While discretionary trusts may not always be tax-efficient, interest-in-possession trusts could provide structured succession planning while mitigating some tax burdens.
• Lifetime Gifting Strategy – Gradual gifting of rental properties over time can help spread CGT liability while reducing overall estate value.
• Debt Planning – Using mortgage debt strategically may reduce the net value of the estate, lowering IHT exposure.

Before making any decisions, seek expert advice to avoid costly mistakes. At McHale & Co., we offer tailored estate planning solutions. Contact us today on 0161 928 3848 or mch@mchaleandco.co.uk to discuss your best options.